Center for World Conflict and Peace

Monday, July 8, 2013

Political Risk and Economic Security in Canada-U.S. Trade Relations

Canada is overwhelmingly the United States’ largest
trading partner, with
approximately 80% of U.S. foreign trade conducted with its northern neighbor; the same fact can be applied almost in the reverse regarding Canada’s
trade relationship with the U.S. According to a report commissioned by the
Canadian Embassy in the U.S., 7.1 million U.S. jobs are supported by Canadian
companies.Such a relationship is not a
mere token of friendship, but is a matter of economic security for both
countries. Certain events in the United States, however, threaten to jeopardize
this relationship, constituting a “political risk” for Canada’s economic investment
in the U.S.

With the
U.S. economy still far from recovered and unemployment still high, any
significant damage to trade relations with America’s chief, nay predominant,
economic partner can only serve to the detriment of U.S. economic security as
well. If the United States cannot properly manage its relations with the
country with which it conducts so much of its foreign trade, Canada may well
seek out options elsewhere. It’s not an issue of hurt feelings and
sentimentality. It is about the strength and viability of the U.S. economy,
something with which Americans cannot afford to be cavalier.

The Canadian
economy has not greatly diversified its export base, and in some ways is a “petrostate” (some even call it an “energy
superpower”). The value of the Canadian dollar is largely tied to the price of
its major export commodity, oil. Yet Canada’s economy is much better suited to
compete in the global market than other so-called “petrostates” such as Russia
and Saudi Arabia, with a great amount of technological and industrial
capabilities and ready access to the burgeoning economies of the Asia-Pacific
region -- a fact further bolstered by the presence of Vancouver, Canada’s largest
port, on the country’s west coast.

Although
the Canadian dollar’s value is largely linked to oil prices, it is also a designated
reserve currency -- the IMF declared it officially as such in late 2012, although
on an informal basis the loonie had
been used as a reserve currency for decades. The IMF’s decision was, in
part, based on the Canadian economy’s relative stability in the post-financial
crisis period. The Economist, in
fact, has described Canada as having the strongest post-crisis economy of the
G7 nations.

Iceland,
which suffered a major collapse of three privately-owned commercial banks, had
considered using the Canadian dollar as its national currency, and while it
ultimately opted not to, Iceland’s choice of the Canadian dollar, as opposed to
the Euro, one of the Scandinavian krone currencies or even the British pound, as
a possible new national currency attests to the Canadian dollar’s strength. The
Bank of England’s decision to invite Canadian banker Mark Carney to succeed Sir
Mervyn King as Governor of the Bank is further testament to the strength and
versatility of Canada’s economy.

The
development of Canada’s economic ties with other global markets is already
developing strongly. Despite both being signatories of the North American Free
Trade Agreement (NAFTA), it’s rather easy to assume that because Canada is
geographically separated from Mexico by the continental U.S. that Canada and
Mexico are united only by their common, more domineering neighbor. Yet of late,
Canada has been developing its own bilateral trade relations with Mexico, both
within and outside the framework of NAFTA.

The Harper
government has also famously pursued stronger relations with China. This isn't to suggest
that Canada is “pro-China,” but Prime Minister Stephen Harper, as a trained economist,
understands that China is an emerging market, and is only separated by an
ocean. In fact, Mr. Harper’s foreign policy overall has demonstrated that
Canada is not the soft “nice guy” on the international stage it has been so
made out to be, and has shown that Canada is still very much a sovereign nation
in control of its own destiny, and will act accordingly, something American conventional wisdom.

This is
not the first time a strong Canadian leader has emerged willing to take steps
to ensure what he felt was best for Canada economically. In 1972, Liberal Prime
Minister Pierre E. Trudeau (who famously told CBC journalist Tim Ralfe “just
watch me,” when asked how far he would go to deal with a political crisis in
Québec), unveiled the “Third Option” which sought to increase Canada’s trade
relations with Asia and Europe. This, however, was replaced by Trudeau’s
second-term successor, Conservative PM Brian Mulroney, who implemented what
evolved to eventually become Canada’s contribution to NAFTA, further shoring up
Canada’s economic ties with the U.S.

The
important difference with those state of affairs then and the reality of the
world today is that much of the world was closed to the type of global trade
that is now the norm today. The bipolar world of the Cold War has given way to
a multipolar world with several emerging markets, many of which do not have
their own adequate supplies of energy, thus strengthening the position of a
state like Canada, which has ample amounts of energy to bring to market.

The Canadian
response to the Obama Administration’s apprehensions regarding the Keystone XLpipelineunderscores
how important energy exports are to Canada’s economic security. It has become
such an important issue in Canada that Canadians have warned that a rejection
of the pipeline would result in a “deep freeze” in Canada-U.S. relations. The
concerns of American environmentalists opposed to the pipeline are certainly
valid, and it appears that a good-faith effort has been taken by the parties involved
in the pipeline’s construction to find ways to build the pipeline without
damaging the environment. The fear on the part of those in support of the
pipeline is that if it's rejected, Canada (which is the largest foreign supplier
of natural energy to the U.S.) will begin to direct its energy sales toward China.

Heightened
border security after 9/11 has also taken its toll on Canada-U.S. trade
relations. With the best of intentions (e.g., protecting both countries from the
entry of terrorists, criminals, etc.), the tightening of the border has slowed
trade relations. For instance, large cross-border shipments of products are held longer at
customs, causing the companies in charge of production, logistics and receiving
to lose valuable time and money, a deplorable situation only due to be
exacerbated by the budget sequestration (which will have an effect on customs and
border protection staff). This is a case-in-point of political risk, where
political actions can cause an unfavorable environment for foreign investment.

If
conditions of political risk are such that the risk-to-ROI ratio is too
unfavorable for the investing party, the company will take its business
elsewhere. This past spring the Globe and
Mail has predicted that the U.S. governmental budget sequestration will have particular bearing on
Canada’s defense industry, which will ultimately have implications for the U.S.
national security, seeing as one of the cornerstones of Canada’s foreign policy
has been engagement in various peacekeeping operations around the world (not to
mention Canada’s strong role in the war in Afghanistan).

When all
is said and done, if Canada does not find their trade relationship with the
U.S. to be profitable, there is nothing to say that they won’t start taking
their business elsewhere. The presence of a large French-speaking population
gives its government and business community ready access to the Francophone
markets in Europe and Africa. And as Canada’s immigrant communities become more
integrated in their adopted homeland and rise to new levels in business, their
language and cultural skills (which tend to be well-preserved in the Canadian
“mosaic”) may well serve to give Canada greater access to other emerging
markets in Asia.

Overall, this means that the U.S. runs the
risk of undercutting its largest foreign trade relationship, a vital aspect to
the U.S.’s economic security. While the Canada-U.S. relationship is strong,
business always rules the day, and Canada will take its business where is best
for its national economy. The Canadian economy is relatively robust, and appears
to have less to lose than the United States. For the sake of economic security,
the U.S. would do well, then, to seek ways to take better care of Canada-U.S.
trade relations. While Americans may be taking steps to protect its border and
its environment, trade is also a major component of national security, and it
would be unwise to trade one facet of security for another.